NNN REIT, Inc.

Good morning, ladies and gentlemen, and welcome to the National Retail Properties third quarter 2022 earnings call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Steve Horne, Chief Executive Officer. Sir, the floor is yours.

Thank you, Ali. Good morning and welcome to National Retail Properties' third quarter 2022 earnings call. Joining me on the call is Chief Financial Officer Kevin Hobick. As this morning's press release reflects, National Retail Properties' performance in 2022 continues to produce strong results, including continued high occupancy, impressive rent collections, and solid acquisitions driven by our tenants' relationships. We are in a position to continue the performance through the fourth quarter. Based on our year-to-date performance, we announced a further increase in our 2022 guidance of core FFO to a range of $3.11 to $3.15 per share. Also during the quarter, we announced and pleased to announce Elizabeth Castro-Glacy has joined the board. Her experience with SeaWorld Entertainment, Cross Country Healthcare, and Ernst & Young will bring a fresh perspective and valuable insight as we continue to grow the company. NNN's long-standing strategy of being selective while deploying capital and opportunistic raising capital over the years slash decades has NNN in great shape heading into 2023. In a time of uncertainty like today's macroeconomic conditions, NNN's discipline of maintaining a solid balance sheet and reasonable acquisition volume does put M&M in good place to handle the price discovery phase the triple net market is currently working through. At the end of the quarter, we had under $50 million drawn on our $1.1 billion line of credit after completing over $585 million of volume through the first nine months of the year. Shifting the highlights of National Retail Property's third quarter results, our portfolio of 3,349 freestanding single-tenant properties continued to perform exceedingly well. We maintained high occupancy levels of 99.4, which remains above our long-term average of 98 plus or minus. We also collected 99.7 of rents due for the third quarter. On the COVID rent deferral front, the repayment continues to track as expected. At the end of the third quarter, 82.1% or $46.6 million of the original $56.7 million deferred rent is being paid back. which is 100% that is due at the time. Based on the current dialogue with our tenants across multiple industries, current rent collection levels, and current occupancy levels, our portfolio is performing at high levels, and we expect that trend to continue. This is a portfolio that has stood the test of time through GFC and COVID. It's been built or formed by M&M's multi-year strategy focus, the luxury of selectivity, and the conservative underwriting over decades by our professionals. Turning to acquisitions, during the quarter, we invested just north of $220 million in 52 new properties, an initial cap rate of six and a quarter, with an average lease duration of 16 and a half years. Nineteen of the 23 deals were from relationship tenants, which we do repeat program business. Through the first nine months, we've invested $585 million in 154 properties, which tops our 2021 volume of roughly $550. Currently, our market is in a price discovery period, but we do see the bid-ask spread showing signs of adjusting, and we will continue our thoughtful and disciplined underwriting approach. NNN continues to emphasize acquisition volume through sale-leaseback transactions with our stable relationship tenants with our company's long-duration triple net lease form, which is more landlord-friendly than the 1031 market deals. During the quarter, we sold eight properties, raising $21 million of proceeds to be reinvested in the new acquisitions. Year to date, we have now raised approximately $50 million of proceeds from the sale of 26 properties, including 14 vacant. Job one is always to release the vacancies, but we will continue to sell non-performing assets if we do not see a clear path of generating rental income within a reasonable time frame. Our balance sheet remains one of the strongest in our sector. Our credit facility has plenty of capacity, as I mentioned earlier, with only a balance of under $50 million. We also have no material debt maturities until mid-2024. NNN is well positioned to fund the remaining 2022 acquisition guidance. With that, let me turn the call over to Kevin for more color and detail on our quarterly numbers and updated guidance.

Thanks, Steve. And as usual, I'll start with a cautionary statement that we will make certain statements that may be considered to be forward-looking statements under federal securities law. Company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we may not release revisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time to time in greater detail in the company's filings with the SEC and in this morning's press release. Okay, with that, headlines from this morning's press release report. quarterly core FFO results of 79 cents per share for the third quarter of 2022. That's up 8 cents or 11.3% over a year ago results of 71 cents per share. The year-to-date nine-month core FFO results were $2.35 per share and that's an 11.4% increase over a year ago results. Today we also reported that AFFO per share was $0.81 per share for the third quarter, and that's up $0.06 per share, or 8% over prior year results. We did footnote third quarter AFFO included $1.7 million of deferred rent repayment and our accrued rental income adjustment for the third quarter, without which would have produced AFFO of $0.80 per share for the quarter. Likewise, in the first nine months of 2022, included 4.7 million of deferred rent repayments in our accrued rental income adjustment, without which would have produced AFFO of $2.38 per share for the nine months of 2022. And that represents a 10.2% increase over the similarly adjusted $2.16 results for 2021. So as these scheduled deferred rent repayments continue to taper off from peak levels in 2021, We're starting to see the improved results kicking in from our recent acquisitions over recent quarters and years. Excluding the deferred rent repayments, our AFFO dividend payout ratio for the first nine months of 2022 was approximately 65%, and that suggests we will create approximately $190 million of free cash flow after the payment of all expenses and dividends for the full year of 2022. As Steve mentioned, occupancy was 99.4% at quarter end. That's up 40 basis points for the year. G&A expense we reported today was $10.1 million for the third quarter, and that's down from $11.1 million a year ago levels. We ended the quarter with $752.8 million of annual base rent in place for all leases as of September 30, 2022, and that's That's our first time over $750 million. Today, we did increase our 2022 core FFO per share guidance from a range of $3.07 to $3.12 per share to a new range of $3.11 to $3.15 per share. And similarly, we increased the AFFO guidance to a range of $3.18 to $3.22 per share. The guidance midpoints for both the core FFO and AFFO were increased by 3.5 cents or 1.1% compared to the prior quarter guidance. The supporting assumptions for our 2022 guidance are on page 7 of today's press release and are modestly fine-tuned from our last quarter guidance, including $25 million increase in the acquisition volume midpoints. As usual, you know, we do not give guidance on any of our assumptions for capital markets activities, except for the general assumption that over the long term, we're going to behave in a fairly leveraged, neutral manner. But really, the most important takeaway from all this is that we expect to grow core FFO per share results in 2022 by about 9% to this. to the new guidance midpoint. This is a very good year for us, what I would call above our target trend line of mid-single digits per share growth over the long term. Admittedly, 2022 was aided by some tailwinds, including some of the refinancing we did in 2021, most notably redeeming our 5.2% preferred stock, which saved us approximately 3 cents per share. as well as $3.3 million increase, or about two cents a share, increase in our cash basis deferred rent repayments in 2022 compared to the prior year. And additionally, we did have one less executive position, which generated some G&A savings in 2022. So that all helped 2022 results, those tailwinds. Like seemingly the vast majority of REITs, we will publish our 2023 guidance in early February when we report our year-end results. It's always somewhat of a challenge to project acquisition volume and cap rates, but in this transition period of rising capital costs pushing up cap rates, it's more difficult to make that projection today than it has been in the past. So the shifting price discovery sands of acquisition cap rates and capital costs has compelled us to wait until early February to publish our 2023 guidance. Having said that, we are still optimistic that we will be able to continue to grow per share results next year, despite the high bar created by the 9% plus growth in our 2022 results, as well as the continuing headwind from the reduction in our cash basis tenant deferred rent repayments, which are scheduled to decline from 9.1 million in 2022 to 3.3 million in 2023, as can be seen on the schedule on page 13 of today's press release. One important element to support our expectation for continued growth in 2023 results is the position of our balance sheet and liquidity. The third quarter was fairly quiet in terms of capital markets activity. We were fairly active and very active in the debt markets in 2021 and not unhappy with that decision. We did issue $97 million of equity in the third quarter via our ATM executing trades around the $47 per share level. So, but despite acquiring 223 million of properties in the quarter and 588 million in the first nine months of the year, We ended the third quarter with only $47.5 million outstanding on our $1.1 billion unsecured bank line, and that's just a small increase over the prior quarter's $40 million outstanding. So our liquidity is in excellent shape. Our weighted average debt maturity is now approximately 14 years. Our next debt maturity is $350 million with a 3.9% coupon in mid-2024. And with the exception of our small balance outstanding on our bank line, all of our debt outstanding is fixed rate debt. A couple of stats, net book to gross book assets was 40.3%, and that's been relatively flat for the year. Net debt to EBITDA was 5.3 times at September 30th, and that's down 10 basis points from the prior quarter. interest coverage and fixed charge coverage 4.7 times for the third quarter. And again, that's relatively flat with recent quarters. So we are in very good shape to produce strong core FFO per share growth. Current 2022 core FFO guidance is suggesting about 9% growth to the midpoint with some tailwinds that put us above our typical growth rate. 2023 should continue that growth despite the absence of some of those tailwinds that we had in 2022. Our focus remains on growing per share results over the long term. We think the asset growth focus acquisition volume contest in many sectors over recent past quarters and years has downshifted materially as the marketplace seeks to adjust to the new environment and appears to be getting a little more disciplined on price. If so, we think renewed investor focus on per share results and managing balance sheets will accrue to our benefit, but time will tell. while there is currently an increased level of increased economic and capital market uncertainty we think we're reasonably well positioned for such so only with that we will open it up to any question thank you ladies and gentlemen the floor is now open for questions if you have any questions or comments please press star 1 on your phone at this time